Consumer Expenditure and Equi-Marginal Utility

Consumer behaviour theory tries to explain the relationship between price changes and consumer demand. Utility is a concept used to denote the subjective satisfaction or usefulness attained from consuming goods and services. This concept helps to explain how consumers divide their limited income / resources among different choices of goods and services that help attain them satisfaction (utility) The issue however is how we are supposed to measure utility and how the value of utility derived from various choices can be quantified. Because of these issues, the consumer behaviour theory has been reformulated and utility is viewed as a way to describe preferences. It was recognised that all that mattered about utility is whether one combination of choice had a higher utility than another; by how much higher or lower didn't really matter Preferences of consumers is the fundamental description important for analyzing choice while utility is just a simple way of describing preferences Total utility

The total satisfaction or fulfilment received by a consumer through the consumption of a goods or services or a combination of both is defined as Total utility. For instance if a person consumes five units of a commodity and derives U1, U2, U3, U4, U5 utility from the successive units of a good, his total utility will be, TU = U1+ U2 +U3+ U4+ U5|

Total utility increases with an increase in consumption, but as consumption rises, total utility grows at a diminishing rate. Every unit of a good or service has a marginal utility and the total utility is a simple addition of all the marginal utilities of the units of goods or services All consumers want to achieve the maximum possible total utility for their spending and thus they look to combine different bundles of goods and services. With their limited resources, consumers make various choices in order to increase their total utility with each additional unit of consumption.

Marginal utilityAs discussed above all consumers attempt to maximize their total utility from the goods and services they consume. This process of optimisation leads the consumers to consider the marginal utility of acquiring additional units of the product or service and of acquiring one product or service as opposed to another. Product characteristics and individual tastes and preferences apart from available resources (money) determine direct demand. Utility is maximised when products are bought at levels such that relative prices equal the relative marginal utility derived from consumption.

The marginal utility of a good is the increase in total utility gained by consuming one additional unit of that good, for a given level of consumption of other goods| Law of diminishing marginal utility

We have discussed earlier that with an increase in consumption total utility increases but at a slower and slower rate. Law of diminishing marginal utility explains this concept. The law of diminishing marginal utility says that as consumption rises the marginal utility of consuming the next unit is less than the previous one. Accordingly the marginal utility of good decreases as more and more units of that good are consumed as shown in the table and figure below: Quantity of Good| Total Utility (TU)| Marginal Utility (MU)| 1| 10| 10|

2| 19| 9|
3| 27| 8|
4| 34| 7|
5| 40| 6|

Equimarginal UtilityThe dollar value of a consumer’s marginal utility from consuming additional unit of a product is called the marginal benefit. It is the maximum price that a consumer will pay for an additional unit and will fall as consumption increases. When different products are available a consumer will ensure that the last dollar spent on each product gives an equal marginal utility (MU) per dollar spent. For two products A and B this can be expressed as:

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...If marginalutility is negative, we can infer that Question 1 answers
| | total utility is increasing by smaller and smaller amounts |
| | total utility has fallen |
| | total utility is also negative / |
| | the product is an inferior good |
A utility-maximising consumer changes their expenditures until Question 2 answers
| | MUX = MUY for all pairs of goods / |
| | TUX/PX = TUY/PY for all pairs of goods / |
| | MUX/MUY = PX/PY for all pairs of goods/ |
| | PX (MUX) = PY(MUY) for all pairs of goods |
The difference between the maximum amount a person is willing to pay for a good and its current market price is known as Question 4 answers
| | consumer surplus / |
| | the substitution effect |
| | profits |
| | marginalutility |
/
Which of the following is NOT a property of an indifference curve? Question 5 answers
| | An indifference curve is convex to the origin / |
| | The consumer is indifferent between any two points on an indifference curve / |
| | The marginal rate of substitution diminishes as you move down the indifference curve |...

...Sultan Lashari, 10K 2629
DATE: 29th/November/ 2010
SUBJECT: Consumer behavior and Marginalutility
We present our report on “CONSUMER BEHAVIOR AND MARGINALUTILITY” that was assigned to us. This report provides information related to rational behavior of individual and utility of individual
This report is divided into some parts, such as the INTRODUCTION. This part gives the overview. Second heading is CONSUMER BEHAVIOR. It consists of definition and we have also explained its ASSUMPTIONS in the third heading .The fourth part give the information about UTILITY. The fifth and sixth part explains the topic with the heading TOTAL UTILITY AND MARGINALUTILITY respectively. After that in the seventh part we have discussed the LAW OF DIMINISHING MARGINALUTILITY. We have also explained UTILITY MAXIMAIZATION RULE AND APPLICATION in the third last and second last part, and the last part focuses on the CONCLUSION.
Table of Contents
Executive summary …………………………………………………………………………………………………………………….5
1.Introduction 6
2.Consumer behavior 6
6. Utility ………………………………………………………………………………………………………………………………………...9
7. Total utility...

...nal utility
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[pic][pic][pic][pic][pic][pic]Find Answers for: What Is Equi-marginalUtility?
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In economics
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it is known as law of Equi-marginalUtility. It basically shows the behavior of a consumer in allocating his limited earnings among different goods and services. In short this law tells that how a consumer distributes his earnings between set of goods so as to get maximum satisfaction.
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1
This theory is propounded by H.H Gossen and called second law of Gossen. It was developed by Alfered Marshall and all the credits are given to Alfred Maeshall.
This theory...

...Law of EquiMarginalUtility
According to this, a consumer is in equilibrium when he distributes his given money income among various goods in such a way that marginalutility derived from the last rupee spent on each good is the same.
Assumptions
The main assumptions of the law of equi-marginalutility are as under:
(1) Independent utilities. The marginalutilities of different commodities are independent of each other and diminishes with more and more purchases.
(2) Constant marginalutility of money. The marginalutility of money remains constant to the consumer as he spends more and more of it on the purchases of goods.
(3) Utility is cardinally measurable.
(4) Every consumer is rational in the purchase of goods.
(5) Limited money income. A consumer has limited amount of money income to spend.
Definition and expLanation of the law:
The law of equi-marginalutility is simply an extension of the law of diminishing marginalutility to two or more than two commodities. The law of equi-marginal, is known, by various names. It is named as the Law of Substitution, the Law...

...CONSUMER BEHAVIOR AND UTILITY MAXIMIZATION
Consumers are assumed to be rational. Given his money income and the market prices of various commodities, he plans the spending of his income so as to attain the highest possible satisfaction. It is possible to measure the amount or level of satisfaction that individuals get from consuming a commodity or a bundle of goods using the concept of utility. Two approaches to the concept of utility (Cardinalists and Ordinalists approach) describe how utility can be gauged. The analysis of how consumers make choices can be done using the budget constraint and indifference curves. An indifference curve shows various bundles of commodities that make the consumer equally happy, or give him the same level of satisfaction.
Utility Defined
Utility is a measure of the satisfaction that a consumer gets from consuming a commodity or a bundle of goods. The marginalutility of a good is the increase in utility that the consumer gets from consuming an additional unit of the good. Most goods are assumed to exhibit diminishing marginalutility ie. the more of a good a consumer already has, the lower the marginalutility derived from the consumption of an additional unit...

...effect. Both effects imply that the quantity of raisins demanded will rise as the price of raisins falls.
4. Using indifference curves and budget constraints, explain how a consumer maximizes utility. Show how this analysis can be used to derive a demand curve for a good. Answer:
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The students need to identify utility maximization as the point of tangency between the budget constraint and the indifference curve. To derive demand they need to vary the price of X and show how consumption of X will change.
5. Brinda has $80 to spend on books and movies each month. Movies cost $8 each and books cost $20 each. Use the table below to answer the following question(s).
Movies per month |Total Utility |MarginalUtility |Mu/P |Books per month |Total Utility |MarginalUtility |MU/P | |1 |50 |50 |6.25 |1 |22 |22 |1.10 | |2 |80 |30 |3.75 |2 |42 |20 |1.00 | |3 |100 |20 |2.50 |3 |52 |10 |0.50 | |4 |110 |10 |1.25 |4 |57 |5 |0.25 | |5 |116 |6 |0.75 |5 |60 |3 |0.15 | |6 |121 |5 |0.63 |6 |62 |2 |0.10 | |7 |123 |2 |0.25 |7 |63 |1 |0.05 | |
a. Fill in the figures for MU and MU/P for both movies and books.
b. Are these preferences consistent with the ‘law of diminishing marginalutility’? Explain briefly.
Yes, these figures are consistent with the law of diminishing marginal...

...Problem Set 2
Name: Nichole Wharton
1. The following table presents data for wages in the market for internet security professionals.
(HINT: in the labor market the roles are reversed. Those who want to hire labor are the demanders. The workers enter the work force providing labor to the market place so they are the suppliers.)
|Wage |Quantity Demanded |Quantity Supplied |
|$50,000 |20,000 |14,000 |
|$60,000 |18,000 |18,000 |
|$70,000 |16,000 |22,000 |
|$80,000 |14,000 |26,000 |
|$90,000 |12,000 |30,000 |
What is the equilibrium wage? $60,000
Now, consider this scenario: Due to an increase in the internet security threats, the government wants to apply a price control in this market to encourage more people to become internet security professionals. Assume that a wage control is set at $75,000. Will this increase the number of people entering this...

...LAW OF DIMINISHING MARGINALUTILITY:
The law of diminishing marginalutility describes a familiar and fundamental tendency of humanbehavior. The law of diminishing marginalutility states that:
“As a consumer consumes more and more units of a specific commodity, the utility from the successiveunits goes on diminishing”.
Mr. H. Gossen, a German economist, was first to explain this law in 1854. Alfred Marshal later onrestated this law in the following words:
“The additional benefit which a person derives from an increase of his stock of a thing diminishes withevery increase in the stock that already has”.
LAW IS BASED UPON THREE FACTS:
* The law of diminishing marginalutility is based upon three facts. First, total wants of a man are unlimitedbut each single want can be satisfied. As a man gets more and more units of a commodity, the desire ofhis for that good goes on falling. A point is reached when the consumer no longer wants any more units ofthat good.
* Secondly, different goods are not perfect substitutes for each other in the satisfaction ofvarious particular wants. As such the marginalutility will decline as the consumer gets additional units ofa specific good.
* Thirdly, the marginalutility of money is constant given the...